GDP is up, but well-being is in decline

Jan 13, 2014

In 2012, gross world product increased to just over $83-trillion, a 4,85% increase over 2011.

On the surface, this metric supports the argument that the worst of the global recession is in the past; however, the economy continues a pattern of slowing growth rates since 2010 and 2011, when gross world product grew 6,35% and 5,67%, respectively.

Moreover, closer inspection shows that growth is taking place mostly in emerging economies: the total gross domestic product (GDP) of emerging economies is now roughly equal to that of all the advanced economies, write Worldwatch researchers in the Institute’s latest Vital Signs Online trend.

The gross world product is the sum of the GDPs of all countries. This typically includes levels of consumption, investment, government spending, the cost of imports, and the proceeds from exports. Because of various transaction costs, floating exchange rates, and barriers such as tariffs, a metric known as the “purchasing power parity exchange rate” is applied to put purchasing power for different countries on an even footing.

Countries that avoided overleveraging themselves while experiencing robust growth in recent years have had relatively healthier fiscal positions and therefore higher levels of foreign direct investment.

This growth was hindered slightly, however, as advanced economies such as the US, Japan, and the members of the European Union (EU) dealt with headline-grabbing crises such as the “fiscal cliff” and the possible breakup of the EU.

Unemployment levels also indicate that, despite continued growth, economic health is far from a rosy picture. According to the International Labour Organisation, 200-million people around the world are unemployed – about 6% of the global workforce.

Conventional economics regards economic growth as an unalloyed good, necessary to improve human well-being. But it is only a nominal indicator, lacking the many intricacies and more subjective goods that are essential to a more encompassing, holistic, and meaningful metric. Given the disparity of benefits, it is clear that in and of itself, growth is far from an effective measuring stick.

Newer metrics seek to paint a more comprehensive and accurate picture of humanity’s overall welfare. One enhanced and widely cited metric is the Genuine Progress Indicator (GPI), which includes the economic cost of expenditures that diminish “community capital.”

And in 2011, the United Nations General Assembly passed a resolution stating that all countries should begin measuring happiness-taking a cue from Bhutan, which began tracking Gross National Happiness in the 1970s.

Similarly, the UN Development Programme prepares a Human Development Index as an indicator of well-being that relies primarily on health (life expectancy at birth), education (mean and expected years of schooling), and living standards (gross national income per capita on a logarithmic scale.)

“Regardless of the approach or specific metrics involved, all studies seem to conclude that sole reliance on GDP growth as the measuring stick for prosperity and well-being is woefully inadequate and probably has been for some time,” writes Mark Konold, the report’s co-author and Worldwatch’s Climate and Energy Caribbean programme manager.

“Higher human development can begin to be seriously measured only when the impact of expenditures is evaluated and when more-qualitative elements are examined as part of a much larger and more complex mechanism to decipher human development.”

But even when these more qualitative factors are considered, most approaches to global economic health ignore the planet’s capacity to provide the resources necessary to sustain it. The resources of the natural environment are finite, whereas human consumption has reached such a point that humanity consumes a year’s worth of resources in less than 365 days.

Further highlights from the report include:

* Non-energy-related commodities were down 7,5% in 2012, while oil prices stayed relatively flat throughout the year;

* The ILO estimates that between 1999 and 2011 (the last year with complete data), labour productivity in advanced economies increased twice as much as average wages. Excluding China, real wage growth has averaged less than 1% a year since the onset of the financial crisis in 2007-08; and

* In the mid-1970s, per capita figures for GDP and GPI, which had shown a strong correlation up to that point, began to diverge for several countries. Although GDP per capita continued to rise, broader economic well-being levelled off and has even declined.